Just a limited set of Real Estate Settlement Procedures Act (RESPA) claims allow for private rights of action, but the list might be growing larger. One Massachusetts federal judge has ruled that borrowers may sue a servicer for failing to properly respond to a notice of error (NOE) as required by the RESPA regulations.

Despite the absence of an express provision granting the private right of action, U.S. District Judge Allison D. Burroughs rejected the servicer’s argument that a private right of action for such a violation does not exist.

What happened

David and Louise Lucas owned a home in Peabody, Massachusetts, executing a note in July 2001 that was secured by a mortgage on the property in favor of Citiwide Home Mortgage. When David experienced serious health problems in 2013, the couple experienced economic distress and defaulted on their loan.

The couple retained counsel to assist them in seeking a loan modification. Their attorney filed a loss mitigation application with mortgage loan servicer Shellpoint Mortgage Servicing. Over the next few months, Shellpoint continued to contact the couple directly by both phone and letter, informing them that a foreclosure sale had been scheduled for their property.

Shortly after, Shellpoint informed their attorney that the couple had been approved for a loan modification, that the paperwork would be sent shortly and that the foreclosure sale would be postponed. The paperwork never arrived, however, and the house was sold at a foreclosure sale on April 12, 2017. The couple was then evicted.

In response to the foreclosure sale, the couple’s attorney sent two NOEs to Shellpoint, the first on April 12 and the second on May 26. A postal return receipt confirmed delivery of the April 12 NOE, but Shellpoint did not respond. The mortgage servicer responded to the May 26 NOE with a letter purporting to be from January 11, 2017, denying the couple’s loss mitigation application, although neither the plaintiffs nor their attorney had ever received the denial.

The Lucases then filed suit, alleging violations of RESPA as well as the Fair Debt Collection Practices Act and Massachusetts state law. Specifically, the plaintiffs sought recovery for Shellpoint’s alleged violation of 12 C.F.R. Section 1024.35 by its failure to timely acknowledge receipt and properly respond to their April 12 NOE.

Pursuant to 12 C.F.R. Section 1024.35, mortgage loan servicers are required to respond to qualified written requests for certain enumerated errors, including that a foreclosure sale was being conducted in violation of 12 C.F.R. Section 1024.41(g), as alleged by the plaintiffs. A servicer that receives a NOE “that includes the name of the borrower, information that enables the servicer to identify the borrower’s mortgage loan account, and the error the borrower believes has occurred” must acknowledge receipt of error “[w]ithin five days (excluding legal public holidays, Saturdays and Sundays).”

The servicer must then investigate the asserted error and either correct all identified errors or, if it concludes that there was no error, provide the borrower with “a written notification that includes a statement that the servicer has determined that no error occurred, a statement of the reason or reasons for this determination, a statement of the borrower’s right to request documents relied upon by the servicer in reaching its determination, information regarding how the borrower can request such documents[,] and contact information, including a telephone number, for further assistance.”

Mortgage servicers are required to comply with the investigation and notification requirements “not later than 30 days (excluding legal public holidays, Saturdays and Sundays)” after receiving the notice at issue.

Shellpoint moved to dismiss, arguing that no private cause of action for a violation of 12 C.F.R. Section 1024.35 exists.

Judge Burroughs denied the motion for two reasons.

“First, the Consumer Financial Protection Bureau (CFPB) promulgated 12 C.F.R. [Section] 1024.35 under 12 U.S.C. [Section] 2605(k)(1)(E) and (j)(3), which provide that the CFPB ‘shall establish any requirements necessary to carry out’ 12 C.F.R. [Section] 2605 and that a servicer shall not ‘fail to comply with any … obligation found by the [CFPB], by regulation, to be appropriate to carry out the consumer protection purposes of this chapter,” the court wrote.

Because 12 U.S.C. Section 2605(k)(1)(E) covers violations of 12 C.F.R. Section 1024.35, a violation of Section 1024.35 is actionable under 12 U.S.C. Section 2605(f), Judge Burroughs said.

As a second reason, the CFPB has noted that regulations established pursuant to 12 U.S.C. Section 2605 are subject to 12 U.S.C. Section 2605(f), which provides borrowers with a private right of action to enforce such regulations, the court explained.

The court therefore denied Shellpoint’s motion to dismiss the plaintiffs’ claims related to the alleged NOE violations of RESPA.

Judge Burroughs noted a split of authority on the issue, citing similar decisions from the U.S. Court of Appeals for the Eleventh Circuit as well as federal courts in California, Michigan and New York, along with contrary authority from Florida, Michigan and New York federal courts.

To read the memorandum and order in Lucas v. New Penn Financial, LLC, click here.

Why it matters

The breadth of potential consumer claims for RESPA violations continues to broaden. Until the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, following RESPA was largely (although by no means entirely) an internal compliance and examinations issue for mortgage lenders. Although certain areas of RESPA contain an explicit private right of action, and Dodd-Frank’s consolidation of Truth in Lending and RESPA disclosures created a broadened exposure, the Massachusetts federal court has seemingly expanded liability for mortgage servicers under the statute by concluding that the right can also be found with regard to NOE violations.